Chipotle Mexican Grill, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless stated otherwise. Chipotle operated 1,539 restaurants at quarter-end, including three ShopHouse restaurants, and reported one operating segment.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Revenue | $826.9 | $700.5 | $2,370.4 | $2,032.1 |
| Operating income | $137.2 | $117.7 | $403.6 | $353.7 |
| Net income | $83.4 | $72.3 | $247.8 | $216.6 |
| Diluted EPS | $2.66 | $2.27 | $7.93 | $6.80 |
| Operating margin | 16.6% | 16.8% | 17.0% | 17.4% |
| Net margin | 10.1% | 10.3% | 10.5% | 10.7% |
| Food, beverage and packaging costs as % of revenue | 33.6% | 32.6% | 33.2% | 32.3% |
| Labor costs as % of revenue | 22.8% | 23.2% | 23.0% | 23.4% |
Q3 revenue increased 18.0%; nine-month revenue rose 16.7%. Comparable restaurant sales increased 6.2% in Q3 and 4.3% for the first nine months. Growth reflected new restaurants and higher comparable sales, driven primarily by customer visits. The company opened 37 restaurants in Q3 and 129 in the first nine months.
Q3 operating income grew 16.6% and net income 15.3%, both slower than revenue growth; nine-month operating income rose 14.1% and net income 14.4%. Food costs and other operating costs increased as a share of revenue, while labor costs declined as a share. (Margins are calculated from reported figures.)
Cash flow, liquidity and capital
- For the first nine months, operating cash flow was $388.7, versus $293.9 in 2012. Capital expenditures were $136.7, versus $137.5; the company reported no separate free-cash-flow measure.
- Investing activities used $323.8, including $293.9 of investment purchases and $106.8 of investment maturities. Financing activities used $79.8, including $97.7 for treasury-stock purchases.
- Cash and cash equivalents were $308.1 at September 30, down from $322.6 at year-end 2012. Cash plus investments totaled approximately $835.9, as reported by management.
- Total liabilities were $445.7, including $179.7 of current liabilities. The filing does not report borrowings or a debt balance; it states there were no off-balance-sheet arrangements.
- Repurchases totaled $97.2 in the first nine months; $103.0 remained authorized at September 30. Total assets were $1,911.4 and shareholders’ equity was $1,465.7.
Outlook and management commentary
- Management expected 2013 restaurant openings to be at or above the high end of its previously announced 165–180 range, and projected 180–195 openings in 2014. Openings through 2014 could include up to five additional ShopHouse restaurants.
- Management expected full-year 2013 comparable sales growth in the mid-single digits, and low-single-digit growth in 2014 assuming no menu-price increases. It said menu prices were likely to rise at some point in 2014.
- Food-cost inflation was expected to persist into 2014, with food costs as a share of revenue expected to increase modestly during the remainder of 2013. Pressures included salsa ingredients, dairy, chicken and higher-cost non-GMO oils; avocado relief and purchases of conventional beef partly offset increases. Supply constraints could lead some restaurants to serve conventional meats temporarily.
- Management estimated a 2013 annual effective tax rate of 38.9%, compared with 39.3% in 2012, and estimated approximately 39.9% for 2014 because certain tax credits had not been extended. Marketing and promotion costs as a share of revenue were expected to increase moderately in 2014.
- Management said cash and investments, together with operating cash flow, should meet foreseeable capital, working-capital and other needs. It noted seasonal variation in sales and profit, and that new restaurants generally have lower margins shortly after opening.
Risks, contingencies and notable items
- Federal investigations continue concerning employee work-authorization compliance and related disclosures: the SEC is conducting a civil investigation, and the U.S. Attorney’s Office in the District of Columbia has a parallel civil and criminal investigation. The company said potential fines or liabilities could not be determined.
- Consolidated shareholder derivative litigation related to work authorization, disclosures and other matters remained pending; the company’s motion to dismiss was awaiting a ruling, and potential liability could not be reasonably estimated.
- Commodity-price exposure is material: most purchases are effectively at spot prices despite supplier pricing arrangements. The company also disclosed interest-rate exposure on investments and limited foreign-currency exposure.
- The company recorded a $3.3 tax benefit in Q1 2013 from federal credits enacted that year and applicable to its 2012 tax return. Management said interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-sales trends and planned restaurant openings meet management’s 2013–2014 expectations.
- Whether food inflation, non-GMO sourcing costs, and any menu-price increases affect margins, traffic or customer response.
- Developments and potential financial consequences of the federal investigations and shareholder litigation.
- How management deploys liquidity among restaurant growth, investment holdings and authorized share repurchases.
- Whether the estimated 2013 and 2014 tax rates are affected by tax-credit availability or other adjustments.